A Closer Look at Market Performance: The Major Indices

Those of us who follow the markets on a regular basis have watched as the major indices have climbed from their lows in March of this year. What has driven this performance?

S&P/TSX Composite Index Performance

The S&P/TSX Composite Index has traditionally been dominated by the financial and resource sectors, both of which have been impacted by the pandemic. The financial sector has struggled with credit losses and the energy sector has been plagued by falling oil prices due to the economic shut downs. These sectors now comprise a smaller proportion of the overall index, which is weighted by market capitalization (share price multiplied by the number of shares outstanding).

A closer look at the Canadian index shows that two sectors have largely helped to support performance: information technology and materials.1 In fact, the information technology sector has increased its presence in the index from 5.7 percent at the start of the year to 10.3 percent by the end of August. This has been largely attributed to the performance of Shopify.

The U.S.: S&P 500 Index Performance

S&P 500 Index performance over the first half of 2020 shows that the biggest companies by market capitalization have had the best returns. This has helped to drive performance of the index. While the median stock in the index was down by 11 percent at the mid-point of the year, the index was only down by around 4 percent.2

The S&P represents about 80 percent of the market value of U.S. equity markets, so it acts as a relatively good reflection of U.S. equities. It is weighted by market capitalization so the stocks with a higher market cap have a greater impact on the movement of the index. In fact, by the end of August, the top 10 stocks accounted for around 29 percent of the S&P 500 index market value.3

What Does This Mean for My Portfolio?

Many portfolios may not be performing at the same level as the index, and this is not unexpected. As the pandemic is far from over, economies have a ways to go to return to normal levels. The current challenges we are facing are reflected in the price of many securities. As the economic situation improves, many are expected to recover.

Portfolios also use diversification to help protect from risk. The largest stocks driving index gains in the first half of the year were largely in the technology sector — which has fared well throughout the pandemic. However, in any given year, the best and worst performing sectors, or even asset classes, often rotate. Without diversification, a portfolio may have the prospect of really fantastic returns, but it also has the risk of poor returns.

There may also be opportunities for those investors looking to add positions to their portfolios. The aggressive rebound of the largest equities is a good reminder that care should be taken in assessing the price paid for any security. Yet, with many equity prices below their highs, there may be opportunities to be found in quality securities that have been temporarily underperforming.

1 S&P/TSX Composite Index at April 2019 and August 2020;
2 S&P 500 Index closing values, 1/1/20 to 7/3/20;
3 S&P500 factsheet August 31, 2020 from spglobal.com